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Slower growth and higher valuation changes Mexican economy rating to neutral

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Second quarter GDP growth for the Mexican economy is due out this week with analysts expecting a slower pace of growth compared to the first quarter: 0.8% versus 1.3%.

[caption align="alignright" caption="Campeche is a beautiful city in Yucatan, Mexico. The city is classified "Patrimony of UNESCO"."] Image courtest Michel Meynsbrughen: [/caption]

The Mexican economy has been fairly insulated from global headline risks this year due to greater reliance on U.S. manufacturing demand and strong domestic sentiment leading up to the presidential election in July.

Sales at supermarkets, department and specialty stores increased on a year-over-year basis In July, though the 3.6% pace was well below the 7.9% growth for June. Despite a more sluggish picture in external markets and exports, domestic demand continues to support the Mexican economy.

Inflation of 4.34% in the Mexican economy is still fairly benign, though just outside of the target range set by the central bank. The International Labor Organization estimates the workforce will grow by 20% in the decade to 2020, well above growth of about 14% in Brazil and Argentina. While labor force growth -- a key component of economic growth -- is supportive, it will also test the government's ability to bring down the 5% unemployment rate . This level of joblessness may seem idyllic compared to more than 8% in the United States, but it is still well above the twelve-year average of 3.6% and could cause some political risk.

I am still cautious on shares of Grupo Televisa ( TV , quote ), though the long-term theme for the market remains strong. The company is the largest media conglomerate in the Spanish-speaking world with operations principally in Mexico and the United States. Revenues at the company grew 11.7% year over year in the second quarter with strong operating margins of 28%, better than performance at 88% of its large cap peers in the same period. Shares are priced relatively expensively at 24 times trailing earnings and royalties from the Univision licensing agreement are uncertain with the launch of the Fox Network's ( NWS , quote ) MundoFox channel.

The iShares MSCI Mexico Investable Market ( EWW , quote ) offers the most diversified exposure into the Mexican economy. The fund holds a large weighting in consumer staples (31.9%), Telecommunications (24.3%) and Materials (15.3%) with smaller weight across consumer discretionary, industrials and financials. The fund also allows investors access to many companies not listed as ADRs in the U.S. market. The fund pays a 1.5% dividend yield and trades for approximately 15 times trailing earnings.

While long-term growth and relative outperformance remains intact, the outlook for the Mexican economy for the rest of the year is not as rosy. We are lowering the country's ranking to neutral until valuations become more attractive or the economic picture in the United States supports growth.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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